Guest Graph: The Future of Medicaid

Harold Pollack is an associate professor of public health at the University of Chicago. He's one of the smartest social policy thinkers I know, and this piece he sent in, arguing that it's time we recognized the centrality of Medicaid and made it a federal program rather than a state partnership, is right on the money.

Amid this health policy tumult, one basic issue receives less attention than it deserves: The precarious condition of Medicaid, our essential but flawed state-federal partnership that finances medical care and related services for almost 50 million people.

Charting a sustainable future for Medicaid is essential for virtually every aspect of health reform, and for the fiscal survival of state governments. Slapped together 45 years ago as a relatively small program that mainly financed healthcare to welfare recipients and their children, Medicaid has evolved into a huge and diverse program that finances almost half of American nursing home and long-term care, bears large responsibilities for the care of disabled adults and children, and is the major vehicle to cover millions of poor and near-poor Americans who would otherwise be uninsured.

Figure 1 shows why state policymakers are panicking. It shows inflation-adjusted medical expenditures by state and local governments between 1960 and 2007.

(These data are drawn from National Health Expenditure data, adjusted for the CPI and expressed in year-2007 dollars. The spreadsheets can be accessed here.)

As state and local medical expenditures cross the $300 billion mark, the existing framework no longer works. Rising Medicaid expenditures undermine states’ ability to address other pressing needs. Saddled with balanced-budget requirements and constrained tax bases, dozens of states are cutting or constraining services at precisely the moment when these services are most needed to meet human needs and to stabilize local economies. The cuts seem most dramatic in California. Yet painful measures are being taken in many other states.

What can be done? First, we must recognize that the budget challenge is more than a nasty episode brought on by the current downturn. States’ Medicaid problems have been building for decades. In truth, states have cut financial corners for decades, underpaying providers, delaying payment, failing to operate these programs with the skill and humanity that patients deserve. The worst is yet to come. Actuaries predict that state Medicaid expenditures will roughly double by 2017.

I should be more careful here. Rhetoric about soaring Medicaid costs is actually misplaced. As a percentage of GDP, past and projected increases in state expenditures are modest, barely exceeding 1% of GDP. They are dwarfed by corresponding changes in Medicare. Figure 2 is identical to Figure 1—except that it includes federal expenditures on the same graph.

As you can see, federal expenditures have increased much faster, in both relative and absolute terms. Projections of future expenditures show the same pattern.

Looking at these figures, you might reasonably ask: Why are states complaining? The answer is: They lack the fiscal capacity to bear the load. They face legal and institutional constraints on deficit financing and new taxes. They bear the consequences of their severe, bipartisan mismanagement of public employee health and retiree benefits.

States also bear readily-overlooked systemic risks. Suppose, for example, that medical improvements gradually raise average lifespan of Alzheimer’s patients in long-term care. Or suppose that the firms which offer private long-term care policies run into trouble. It’s all too plausible to devise scenarios in which state Medicaid programs end up bearing large unanticipated costs.

One way or another, the federal government must carry an increasing share of the Medicaid burden. Properly designed, health reform can also help by providing new forms of public or private coverage for low-income Americans who might otherwise require Medicaid. The impact of competing proposals for state finances has received less attention than it should.

The recent stimulus package suggests another useful path. Until December 31, 2010, the federal government agreed to pay a higher matching rate to states that agreed to maintain Medicaid eligibility and benefits at roughly pre-recession levels. These subsidies should be enlarged and made permanent, in return for greater federal oversight over matters such as quality assurance and reimbursement.

These fixes will help, but they will not be enough. As my colleague Colleen Grogan suggests, we should recognize and embrace the fact that Medicaid has become a central pillar of the American welfare state, not only for poor people, but for millions of others, too. The program has outgrown the financial and administrative capacity of state governments. Yet another challenge of health reform.

The huge variances in the actual help provided by the states to their citizens certainly is a overwhelming argument that the current Medicaid program needs to be completely federalized and standardized (like Medicare) - each person is a citizen of the USA and I think a convincing equal protection argument can made that being in one state versus another should not influence whether you get nursing home care or not (as well as quality/expenditure differences).

Medicaid should be folded directly into the National Public Option of a true reform package, with the same public funding for low income people as those currently not covered by Medicaid. The states are an unreliable source of financial support because of their prohibitions of unbalanced budgets, and the huge differences in what various legislatures are willing to fund even in good times. CA is illustrative: Arnuld is proposing to essentially eliminate welfare to balance his budget. Can other states be far behind in proposing this step?

The bigger the risk pool, the better for every person in the country. Single payer solves this problem, but a National Public Option can achieve much of this good outcome, if tailored properly.

Note also that many medical providers that accept Medicare patients refuse to participate in Medicaid because of lower payments, and this problem will only get worse under the current system with split funding by the states and the federal gov't.

That spreadsheet generating Ezra's charts also appears to show private health expenditures growing slightly less steeply over the period in question. Keep this in mind when Ezra says that a public plan will save money.

tomtidrum - I recently went to a lecture by Uew Reinhardt. He showed a graph with two curves. The top one was total projected health care spending from the present to 2050 and the lower one was projected Medicare spending. The curves diverged; they got further apart. So there is at least some controversy about this point.

Personally I don't believe any of these projections when used as predictions especially the ones based on constant growth. Remember in 1998, the CBO projected 10 years of surplses. I look at how much we can save now, and there the evidence is overwhelming.

The CBO is required to make their projections as if there will be no changes in policy other than the ones they are asked to consider. After 1998, the Bush Administration instituted massive tax cuts and spending increases, so there's no basis for arguing that the 1998 projection was "wrong" and therefore we can't trust any cost projections.

I agree with you that Harold Pollack is a smart guy and that it's time we recognized the importance of Medicaid. But, one clarification for your readers -- Medicaid and CHIP costs only make up about $146 billion in state and local health expenditures cited by Dr. Pollack. The other half of the $300 billion is spent on expenses such as workers compensation, and public health needs. Even this is still a major investment for states, especially in the current economic downturn.

If the goals of health reform are to be met, Medicaid will not only need to be maintained, it must be strengthened and fully-integrated with other core components of the health care system and we’ll have to make sure that states sustain the program during economic downturns. One of my colleagues, Joan Alker at Georgetown CCF, recently blogged about strategies for improving Medicaid with an eye on its role in health reform. It’s time to give Medicaid the attention and support it deserves. (http://theccfblog.org/2009/04/everything-you-wanted-to-know-about-medicaid-but-were-afraid-to-ask.html)